Service is the survivor sector

Justin McLachlan says he is yet to see any of his clients cut back on visiting his hair salon in Brisbane, despite the much-publicised move towards frugality by households in recent quarters. And there are reasons for him to be more optimistic about sales than other retailers selling goods like clothes or furniture.

“We see most of our clients every six weeks," says McLachlan, who co-owns Oscar Oscar hair salon in Brisbane’s central business district. “They might be cutting back on other things, but they seem to be happy spending money on beauty. We just haven’t seen the slowdown in spending that other people say they have."

The national accounts reveal that Australians have continued to spend on services like hair care, recreation and education, even as spending on goods has been lacklustre.

Services spending grew 3.8 per cent over the past year, while spending on goods such as clothing, food and furniture managed a 2.6 per cent rise, its strongest in three years after sitting close to zero in real terms in recent years. Spending on clothing and food has grown about 2 per cent while recreation spending has surged by about 7 per cent.

Overall, consumption spending has been growing at about 3 per cent over the past year – slower than the pace of income growth as household savings are at about their highest in 25 years. In the March quarter, households saved 11.5 per cent of disposable income.

Economists suspect things will get better for all retailers from here, but the service sector will outshine goods retailers for some time yet.

AMP chief economist
Shane Oliver
says the worst is behind retailers as the savings rate has probably stabilised. If anything, it could fall slightly which would boost retail spending, he says.

But one reason businesses selling services are doing well is they haven’t felt the harmful effects of the higher Australian dollar as goods retailers have. Oliver says the sharp rise in the number of overseas trips taken by Australians means they are probably doing a lot of their goods shopping on holidays, as well as online.

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A longer run economic phenomenon is also taking place, which means that hairdressers like McLachlan see their profits rise more than retailers selling goods such as food and clothing. As income rises, consumers spend more on goods considered luxuries and allocate less of a pay rise on basics because those needs have been met.

In the March quarter, Australians allocated about 11 per cent of their spending to food, far below the 20 per cent in the 1960s, when the Australian Bureau of Statistics started keeping data. Spending on clothing has also halved as a share of the basket, from 6.3 per cent in the 1960s to 3.5 per cent in March.

Instead, consumers have spent more of their incomes on services like holidays, private school education, communication and recreation activities.

In March, shoppers spent just as much of their income on recreation as they did on food, and overall recreation spending has doubled as a share of the basket in the past 50 years.

“The share of the consumer dollar to goods goes down. It doesn’t mean there is no growth in goods consumption, but [it’s] just at a slower pace than income," BT Financial Group chief economist Chris Caton says. “That is a long-term trend that has been going on for 200 years and will continue for many years to come."

And households will spend more and more on beauty services according to Mr McLachlan in Brisbane, who says that men in particular are starting to care more about their appearance.